The Dilemma of Tax Competition: How (not) to attract (Inefficient) Firms?
AbstractWe consider a tax competition game between asymmetrically un-informed governments. Two governments simultaneously propose tax arrangements to attract a multinational firm (MNF) which has an ex-ante preference to operate in both countries, and governments anticipate that once the MNF accepts their offer, each host will know the marginal cost of local production, but not the marginal cost in the other country. We show that when the multinational prefers to operate in both countries or not operate at all, then the tax competition game features two equilibria. In one equilibrium, efficient MNFs are attracted in the two countries, while in the other equilibrium, inefficient MNFs are attracted. The equilibrium in which only efficient firms are attracted may occur as the unique outcome if the MNFs can ultimately decide to settle in one country only. Our results suggest that, the existence of (small) countries who are aggressive in attracting MNFs by offering substantial tax advantages allows competing governments to keep inefficient firms away from their territories.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-68.
Date of creation: 2004
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Common Agency; Adverse Selection; tax competition; Multinationals;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-09-30 (All new papers)
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